Hi There:
Clearly you have a good feel for the issue at hand. Here's a little tidbit re: earned income credit for you to consider (if applicable). Also please consider all avenues of tax law before making a decision.
Feigh vs. Commissioner
Feigh v. Commissioner concluded that Medicaid waiver payments were earned income. This means, in the context of a W-2 person and the earned income credit (EIC), earned income is compensation received as an employee (for example wages), but only if the amount is included in gross income for the tax year. Medicaid waiver payments that may be excluded from income under Notice 2014-7 may still be treated as earned income for purposes of the EIC.
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